ECL Finance And Edelweiss ARC Respond To RBI's Supervisory Actions

According to RBI, Edelweiss Group potentially misused EARCL and AIFs to manage ECL's stressed assets, bypassing regulations.

ECL Financial Edelweiss Asset Reconstruction Company (EARCL) has addressed the governance concerns of the Reserve Bank of India (RBI) and is committed to aligning its performance with regulatory expectations. On May 29, the RBI announced monitoring against these companies due to basic supervisory concerns.

According to a statement issued on May 30 by both companies, Edelweiss ARC assured stakeholders that its operations and legal obligations would be fulfilled and that prompt action would be taken to address the concerns voiced by the RBI. On the other hand, ECL Finance restated its commitment to following the RBI's recommendations and aimed to address the problems within the allotted three weeks.

The RBI has instructed ECL Finance to cease any structured transactions related to its wholesale exposures, except for repayment or closure of accounts as part of its regular business activities. Meanwhile, EARCL is barred from acquiring financial assets, including security receipts (SRs), and from reorganizing existing SRs into senior and subordinate tranches.

The RBI’s actions stemmed from concerning findings in the monitoring inspections. The central bank revealed that Edelweiss Group companies used EARCL’s platform and associated alternative investment funds (AIFs) to create structured transactions for ECL’s evergreen stressed risks, which circumvented the regulations. Additionally, both ECL and EARCL noted incorrect examination of securities receipts.

Submitting false information to lenders about its eligible book debts, not adhering to Know Your Customer (KYC) guidelines, not following loan-to-value standards when lending against shares, and providing false information to the Central Repository of Information on Large Credits (CRILC) system were among the additional supervisory observations for ECL. The RBI pointed out that ECL took over loans from non-lender entities within the group for eventual sale to the group ARC, effectively using itself as a conduit to bypass regulations permitting ARCs to acquire financial assets only from banks and financial institutions.

Other violations on EARCL are such as the failure of the RBI administrator in his team, as they did not govern the institutions of the group, and the institutions that had the top management of these institutions. Complete development work, whereby it has become necessary to establish operating limits, has not been carried out.

Both businesses have received instructions from the central bank to bolster their assurance departments in order to guarantee regulatory compliance. Once the supervisory review is resolved to the RBI's satisfaction, the trading restrictions will be changed. The RBI may take further regulatory or supervisory action against the companies in addition to these penalties.